The Fed’s Latest Move: Rate Cuts and Mortgage Opportunities
Earlier this month, the Federal Reserve announced a cut to the Federal Funds Rate by .5%, which has a positively correlated relationship with interest rates across the entire economy. Over the past few years, the Fed has been raising rates to combat high inflation, which reached as high as 9.1% in July of 2022. Since then, inflation has decreased to 2.5% as of August 2024, bringing it closer to the Fed’s target inflation rate of 2%. The Fed believes that this is sufficient enough to follow through with their decision.
This rate cut will reduce the yield on savings accounts, CDs, and money market funds, which makes holding cash reserves less valuable (but still necessary). On a positive note, lower interest rates cause loans such as mortgages, personal loans, and auto loans to be more affordable.
One notable example of this is 30-year fixed rate mortgages, which have already seen a significant drop. Since the economy moves quite quickly at times, these interest rates have dropped in anticipation of the rate cut. From a peak of around 7.7% in November 2023, they have fallen to just under 6% this month. This should incentivize potential home buyers, but most importantly, create a good opportunity for homeowners with higher-rate mortgages to refinance. A significant refinance can save a lot of money over the course of the loan.
While the future actions of the Federal Reserve are uncertain, the current chair Jerome Powell has said they plan to make cuts to the Federal Funds Rate throughout the rest of the year and into 2025, depending on the economic conditions.
At the end of the day, none of these issues should dictate your investment strategy, despite the influence that rate cuts will have on the free market. Your decisions on asset location should be a choice based on your risk tolerance and personal financial goals, rather than the short-term shifts of the stock and bond market.
Citations:
FOMC Press Conference. September 18, 2024.
Federal Reserve Economic Data: 30-Year Fixed Rate Mortgage Average in the United States
U.S. Bureau of Labor Statistics: 12-Month percentage change, Consumer Price Index
